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1 Nov 10, 2016 Inox Wind Ltd. No. of shares (m) Mkt cap (Rs crs/$m) 4482/670.9 Current price (Rs/$) 202/3.0 Price target (Rs/$) 280/ W H/L (Rs.) 378/161 Book Value (Rs/$) 88.1/1.3 Beta 1.1 Daily volume (avg. monthly) P/BV (FY17e/18e) 2.0/1.6 P/E (FY17e/18e) 10.6/9.4 EPS growth (FY16/17e/18e) 37.4/-6.8/13.6 ROE (FY16/17e/18e) 28.1/20.7/19.3 OPM(FY16/17e/18e) 15.6/14.2/14.5 Net D/E ratio (FY16/17e/18e).5/.3/.2 BSE Code NSE Code Bloomberg Reuters INOXWIND INXW IN INWN.BO Shareholding pattern % Promoters 85.6 MFs / Banks / FIs 5.0 FIIs 0.9 Govt. holding - Non-promoter group - Public & others 8.5 Total As on September 30, 2016 Recommendation BUY Phone: + 91 (33) E- mail: research@cdequi.com Company Brief IWL, one of the largest integrated wind power solution providers in India, manufactures wind turbine generators and provides complete turnkey solutions such as supply of WTG, land acquisition, infrastructure development, power evacuation and operation & maintenance services. Quarterly Highlights Q1FY17 saw one of the lowest volumes in last 8 quarters- commissioning and turbine volumes stood at 48 MW and 40 MW respectively. This was a conscious decision on the part of the management to clear the inventory backlog created due to initial higher production of nacelles and hubs. Going ahead the company aims to synchronize production of components with supply of complete sets of WTGs to improve the working capital cycle. The company has consciously focused more on the production of blade and towers and less on the production of nacelles and the hubs in H1FY17. It is evident from the fact that in H1FY blade set equivalent to 366 MW (280 MW in H1FY16), 143 towers equivalent to 286 MW (340MW) and 81 nacelles and the hubs equivalent to 162 MW (332 MW) were produced Some other key highlights of the last quarter include significant fresh order inflow of 322 MW and the launch of Inox s 120-meter tower. The ICD amounting to Rs. 152 crs ($22.8m) was repaid during H1 and the balance will be repaid over the forthcoming few months, thus somewhat easing its liquidity crunch. Order book as of September 30, 2016 is 1346 MW, which is one of the largest order books in the industry and represents roughly 12 to 15 months of execution time. During the quarter Inox bagged repeat orders from the likes of ReNew Power, PTC Green Energy, CESC, Malpani Group and also bagged maiden orders for execution in Karnataka. The stock presently trades at 10.6x FY17e EPS of Rs and 9.4x FY18e EPS of Rs Robust order book and plans to vend only complete products in future points towards efforts to streamline inventories. However, the company s unchanged receivable position (static at Rs crs since the last two quarters) and jittery working capital cycle cannot be blatantly ignored. The impetus provided by the government to this industry provides some consolation. With the management s plans to overcome operational difficulties by next couple of quarters and exploit the scope of this industry, we re-affirm our previous rating of buy with a revised target of Rs. 280 based on 13x FY18e earnings, over a period of 9-12 months. Figures (Rs crs) Income from operations Other Income EBIDTA (other income included) Adjusted PAT EPS (Rs.) EPS growth (%) FY14 FY15 FY FY17e FY18e

2 [ CD Equisearch Pvt Ltd Outlook & Recommendation Outlook of Wind Energy Sector We live in the modern era of clean energy growth that can fuel a future of opportunity and greater prosperity for every person on the planet. Renewable energy, so far considered to be an alternative to the conventional fuel source has now progressed into becoming a regular energy source. This shift is driven by the improved cost efficiency of renewable energy sources with the help of advancements in technology combined with an increasing focus on climate change which is leading people, companies and countries to consume energy from more efficient sources. There is heightened awareness about disciplining the emitters of greenhouse gases. Governments, businesses and investors around the world are realizing that the evolution to low-emission, climate-resilient growth is imminent, beneficial and already under way. Now that the Paris Agreement is coming into force, countries need to get serious about what they committed to last December. Meeting the Paris targets means a completely decarbonized electricity supply well before 2050, and wind power will play the major role in getting us there, said Steve Sawyer, GWEC (Global Wind Energy Council) Secretary General. Source: Wikipedia Source: Wikipedia Source: Energy Alternatives India The mainstream position of renewables is evidenced in the global installations during 2015 which stood at 64 GW of wind energy and 57 GW of solar energy. Leading the passage from fossil fuels to renewable sources are the developing nations, including India and China, among others. The renewable industry recorded a growth of 18% CAGR in 2015 and is expected to attract US$5.86 trillion worth of investment till (Source: IEA, World Energy Investment Outlook; 2014) This poses massive growth potential for the sector in India. With the government s commitment made at COP21, to install 175 GW of renewable energy by 2022, and to reduce carbon emissions by 30-35% and increase renewables to 40% of the energy mix by 2030, India is set to truly expand its renewable energy portfolio. The production is getting a marked boost through the Make in India initiative. The government has also strived to facilitate the growth of renewable energy through the establishment of a positive policy and business environment. As a result, the sector witnessed annual installations of 3,415 MW in FY15-16, higher than ever before and 48% higher than the 2308 MW of the previous year. A major portion of this capacity addition was accounted for by new projects in MP- where more than a third of the capacity (1290 MW) was added, Rajasthan (688 MW) ), Gujarat (388 MW and AP (363 MW), arising out of the substantial reduction in preferential tariff for new wind energy. The Indian wind energy industry is expected to grow at a rate of 30% annually, and may even surpass this on the back of the positive policies. The Supreme Court supported Renewable Purchase Obligation (RPO) compliance, the Renewable Generation Obligation (RGO), Green Corridor, inter-state transmission charges waiver, inclusion of renewable energy in the priority lending sector, UDAY scheme which gives state utilities stronger credibility to invest in renewable energy and approval of National Off-shore Policy which has opened up 7,600 km of coastline for off-shore wind energy generation projects have all positively affected the environment and established a US$200 billion opportunity. Foreign investment in the industry is also surging. (Source: ICRA) 2 2

3 "Further, the expiry of generation based incentive from March 31, 2017 and reduction in accelerated depreciation benefit...could also impact the wind power capacity addition from FY2018 onwards," ICRA Ratings Senior Vice President Sabyasachi Majumdar said. ICRA notes that the incremental wind-based energy capacity requirement by FY22 is estimated at about 35 GW as against the current installed capacity of 27.4 GW. This is assuming annual energy demand continues to grow at 6%, RPO at 12% by FY22 and wind as a renewable energy resource contributing to a dominant share (75%) in meeting the non-solar RPO requirement on an all India basis. ICRA however notes that the sector is facing challenges due to the continuous variation in RPO norms across the states as well as the limited RPO compliance. The RPO norms continue to vary across the states in terms of both quantum of RPO, varying from 2% to 12.50% in FY17 across the states, and the period of RPO trajectory with only six states stipulating RPO norms till FY22. According to IRENA (International Renewable Energy Agency), technology innovation will be a significant driver of the offshore wind boom. It highlights upcoming innovations that will enable sector development, including next generation wind turbines with larger blades, and floating turbines, which will open up new markets in deeper waters. These advancements, combined with other sector developments, will reduce average costs for electricity generated by offshore wind farms by 57% over time from $170 per MWh in 2015 to $74 per MWh in Financials and Valuations Continuing from Q1, production in last quarter was further geared towards clearing the inventory backlog and improving the working capital cycle of the company. One of the key reasons of working capital blockage was a mismatch in manufacturing capacities and therefore to this extent, last quarter Inox again focused on correcting that mismatch. The company has deliberately focused more on the production of blades and towers relative to the production of nacelles and hubs. For the first half of the current fiscal year, 162 MW of nacelles and the hubs were produced versus 332 MW last year, 366 MW of blades were produced versus 280 MW last year and 286 MW of towers were produced versus 340 MW last year. 194 MW was commissioned in the first half of the current year versus 216 MW in the first half last year. In terms of cost analysis for the first half of the current fiscal, raw material and EPC cost which were at 74.9% of the overall sale price in H1 last year is now down to 70..4%, which is a cost saving of almost 450 bp. Other variable cost was at about 3.5% last year versus 3.6% this year. Fixed overheads went up from 7.3% to 14.2% largely because of lower production of nacelles and the hubs. Source: IWL Source: IWL Source: IWL Other expenses in Q2- which increased 73% q-o-q, depend on freight costs and on what the company is paying to third party tower manufacturers. Last quarter there has been a lot of logistic movement of inventory to south, such as AP and Karnataka, where Inox is building new projects. Logistic costs in blades and towers are almost two to three times the logistics cost of a nacelle and since the company has dispatched huge amounts of blades and towers as opposed to nacelles to overcome the inventory mismatch which was prevalent in the last few quarters. 3 3

4 Inox, one of the largest land bank owners in the country with land of more than 4500 MW, will be one of the biggest beneficiaries of the hybrid policy (Read as both solar and wind). It plans to install solar panels in wind parks where it already has the common infrastructure commissioned and constructed and since both technologies are complementary Inox will be one of the lowest suppliers of hybrid services as well, especially when it comes to installing solar panels. Inox is seeing a lot of traction as far as cash collection is concerned. In Q1 it clocked close to Rs. 450 crs ($ 67.4m) whereas in Q2 it collected a good Rs. 850 crs ($ 127.3m). More than 80% of the receivables i.e., approx. Rs 2000 crs ($299.4 m) is less than 180 days. However, the receivables remaining constant raise some grave concerns. Being a relatively new player in the industry took toll on the company s working capital- the company was not able to negotiatee favorable terms with the customers and had to suffer on account of lagged payments. The payments came in only after the entire component is supplied or commissioned, as the case maybe. With production streamlined in H1, revenues shrunk by 25.6%, thus affecting the margins- half year operating margin stood at 11.9% (14.3% in H1FY16) whereas the net profit margin is a mere 5.5%. Source: IWL Sources: CD Equisearch; IWL Sources: CD Equisearch; IWL Various steps undertaken by the company to improve the working capital cycle includes revised payment terms with the customers, making sure that the majority of new orders are backed by letter of credits, etc. Keeping the first half in mind, going forward the operating margins are expected to stay firm (15% in H2FY17 vs 11.9% in H1FY17). Due to reasons mentioned above, the overall turbine volumes are expected to de-grow by 5% (785 MW) before growing in FY18 by 10% (863 MW); commissioning is expected to grow by 12.5% in both FY17 and FY18. Revenue growth is likely to settle in the 10-12% range henceforth. The sister concern, Indian Renewables Ltd. is expected to pay off the entire ICD of Rs. 278 crs ($41.6m). Source: CD Equisearch Source: CD Equisearch Source: CD Equisearch The stock presently trades at 10.6x FY17e EPS of Rs and 9.4x FY18e EPS of Rs Robust order book and plans to vend only complete products in future points towards efforts to streamline inventories. However, the company s unchanged receivable position (static at Rs crs/$361.4m since the last two quarters) and jittery working capital cycle cannot be blatantly ignored. Earning cuts for FY18 emanates from weaker order executions so far this fiscal. The impetus provided by the government to this industry provides some consolation. With the management s plans to overcome operational difficulties by next couple of quarters and exploit the scope of this industry, we re-affirm our previous rating of buy with a revised target of Rs. 280 (previous target Rs.322) based on 13x FY18e earnings, over a period of 9-12 months. (For more information refer to our May report) 4 4

5 Risks and Concerns Competitive Landscaping Competition for IWL arises in the form of many multinationals, Indian and Asian players. Competition is based on the performance of WTGs, price, site selection, reliability, product quality, technology, scope and quality of services- including operations and maintenance services, training offered to customers and technical factors- industry experience, technical ability, past performance, reputation for quality, safety record and the size of previous contracts executed for similar projects. Dependence on customers As such there can be no guarantee that the orders will be confirmed and executed, and that binding contacts will not be cancelled or reduced and that payment will be received as per the mentioned terms in the orders. Adverse conditions in the global financial markets, any delay or failure to obtain the necessary permits, authorizations, permissions or other factors beyond control may cause customers to postpone or cancel a project. These coupled with payment postponement, payment default, execution difficulty and disputes with customers the operations Regulatory changes Changes in the government policies and support for the infrastructure sector, especially the renewable energy sector, affects the growth prospects and results of the operations. The reduction in policy incentives such as accelerated depreciation and generation based incentives can have an adverse impact on wind installations. Forex Fluctuation Fluctuation in the value of the rupee against foreign currencies may have an adverse effect on the company s results of operations. Un-hedged trade and financial exposure thus creates potential to adversely impact projects and overall profitability. Cross Sectional Analysis Company Equity CMP MCAP* Sales* Profit* OPM (%) NPM (%) Int Cov Inox Wind Suzlon *figures in crores; calculations on ttm basis ROE (%) Mcap/ Sales P/BV P/E Source: CD Equisearch, Companies Source: CD Equisearch, Companies 5 5

6 Financials Quarterly Results- Consolidated Figures in crs Q2FY17 Q2FY16 % chg HIFY17 H1FY16 % chg Income From Operations Other Income Total Income Total Expenditure EBITDA (other income included) Interest Depreciation PBT Tax PAT EPS(Rs) Income Statement- Consolidated Income From Operations Growth (%) Other Income Figures in crs FY14 FY15 FY16 FY17e FY18e Total Income Total Expenditure EBITDA (other income included) Interest Depreciation PBT Tax PAT EPS (Rs)

7 Balance Sheet Sources of Funds Share Capital Reserves Total Shareholders Funds Long Term Debt Total Liabilities Figures in crores FY14 FY15 FY16 FY17e FY18e Application of Funds Gross Block Less: Accumulated Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans & Advances Inventory Trade Receivables Cash and Bank Short term loans Other Assets Total CA Current Liabilities Provisions-Short term Total Current Liabilities Net Current Assets Net Deferred Tax Net long term assets ( net of liabilities) Total Assets

8 Key Financial Ratios Growth Ratios(%) Revenue EBITDA Net Profit EPS Margins (%) Operating Profit Margin Gross Profit Margin Net Profit Margin Return (%) ROCE RONW Valuations Market Cap/ Sales EV/EBITDA P/E P/BV Other Ratios Interest Coverage Debt Equity Net Debt Equity Current Ratio Turnover Ratios Fixed Asset Turnover Total Asset Turnover Debtors Turnover Inventory Turnover Creditor Turnover WC Ratios Debtor Days Inventory Days Creditor Days Cash Conversion Cycle FY14 FY15 FY16 FY17e FY18e

9 Cumulative Financial Data FY13-14 FY15-16 FY17-18 Turbine volumes (MW) Commissioning volumes (MW) Income from operations Operating profit EBIT PBT PAT OPM (%) NPM (%) Interest Coverage ROE (%) ROCE (%) Debt Equity* 1 Fixed asset turnover Debtors turnover Inventory turnover Creditors turnover Debtor days Inventory days Creditor days Cash conversion FY13-14 implies two years ending fiscal 14; *as on terminal year; Belonging to an industry which grew at a CAGR of 15.7% in the last 11 years, a 17.4% growth in the combined turbine volumes (1648 MW) is expected in two years ending FY18 (over FY15-16) for Inox. This growth is somewhat moderated in comparison to the management s expectations. The alignment of production and supply, which the company was lacking till the last quarter, should prop the company in the right direction. Debtors have swelled by 4.8 times from Rs. 500 crs ($74.9 m) in FY13 to Rs crs ($361.4 m) in FY16 and are further expected to amplify to Rs crs ($486.2 m) in FY18. Inventory mismanagement and delay in collecting payments proved to be detrimental for the working capital cycle of the company. The company which boasted of a cash conversion cycle of just 101 days in FY14 is struggling to maintainn it at historic levels. It is projected to increase almost 50% to 151 days by FY18. This increase is mainly contributed by the sharp increase in debtor days -141 days in FY14 to 204 days in FY

10 Financial Summary US dollar denominated million $ FY14 FY15 FY16 FY17e FY18e Equity capital Shareholders funds Total debt Net fixed assets (incl CWIP) Investments Net current assets Total assets Revenues EBITDA EBDT PBT PAT EPS($) Book value ($) *income statement figures translated at average rates; balance sheet at year end rates; projections at current rates All dollar denominated figures are adjusted for extraordinary items

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